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Macroprudential Policies

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Marriott Marquis, Grand Ballroom 1
Hosted By: American Economic Association
  • Chair: Julie Garin, Claremont McKenna College

Cross-Border Effects of Prudential Regulation - Evidence from the Euro Area

Dawid Zochowski
,
European Central Bank
Luca Nocciola
,
Goethe University Frankfurt
Fabio Franch
,
Reserve Bank of Australia

Abstract

We analyse the cross-border propagation of prudential regulation in the euro area. Using the Prudential Instruments Database (Cerutti et al., 2017b) and a unique condential database on balance sheets items of euro-area financial institutions we estimate panel models for 248 banks from 16 euro-area countries.

We find that domestic banks reduce lending after the tightening of capital requirements in other countries, while they increase lending when loan-to-value limits or reserve requirements are tightened abroad.

We also find that foreign branches increase lending following the tightening of sector-specific capital buffers, loan-to-value limits or local reserve requirements and that bank size, capitalization and liquidity play a role in determining the magnitude of cross-border spillovers.

Digging Deeper - Evidence on the Effects of Macroprudential Policies from a New Database

Zohair Alam
,
International Monetary Fund
Adrian Alter
,
International Monetary Fund
Jesse Eiseman
,
International Monetary Fund
Gaston Gelos
,
International Monetary Fund
Heedon Kang
,
International Monetary Fund
Machiko Narita
,
International Monetary Fund
Erlend Nier
,
International Monetary Fund
Naixi Wang
,
International Monetary Fund

Abstract

This paper introduces a new comprehensive database of macroprudential policies, which combines information from various sources and covers 134 countries from January 1990 to December 2016. Using these data, we first confirm that loan-targeted instruments have a significant impact on household credit, and a milder, dampening effect on consumption. Next, we exploit novel numerical information on loan-to-value (LTV) limits using a propensity-score-based method to address endogeneity concerns. The results point to economically significant and nonlinear effects, with a declining impact for larger tightening measures. Moreover, the initial LTV level appears to matter; when LTV limits are already tight, the effects of additional tightening on credit is dampened while those on consumption are strengthened.

Liquidity Constraints and Consumption: Evidence from Macro-Prudential Policy in Turkey

Sumit Agarwal
,
National University of Singapore
Changcheng Song
,
Singapore Management University
Muris Hadzic
,
Lake Forest College
Yildiray Yildirim
,
City University of New York-Baruch College

Abstract

Using account-level credit card data from a large Turkish bank, we study the impact of a unique restrictive credit card policy that increases minimum payment on consumption and debt repayment behavior. We show that the policy reduces credit card spending and debt, boosts existing debt repayment, and reduce credit card delinquency. The credit card debt of affected consumers falls on average by TL416 ($232) or 46% two years into the policy implementation. Overall, our results demonstrate that the policy that mandates a higher minimum payment ratio has a significant impact on household debt by changing both consumers’ spending and debt payment behavior. We also show that an increase in minimum payment has a much stronger effect than a decrease of similar magnitude. Our findings imply that macro-prudential policies are likely to be effective when they are tightening, but not otherwise.

Take It to the Limit? The Effects of Household Leverage Caps

Rustom Irani
,
University of Illinois-Urbana-Champaign
Sjoerd van Bekkum
,
Erasmus University Rotterdam
Marc Gabarro
,
University of Mannheim
José-Luis Peydró
,
ICREA, Pompeu Fabra University, CREI, Barcelona GSE, Imperial College London, and CEPR

Abstract

We analyze the effects of borrower-based macroprudential policy at the household-level. For identification, we exploit administrative Dutch tax-return and property data linked to the universe of housing transactions, and an introduction of loan-to-value regula- tion. The regulation reduces overall household leverage, with bunching in its limit. Ex- ante more-affected households substantially reduce leverage and debt servicing costs. Rather than buying cheaper homes or taking lightly-regulated loans, households con- sume greater liquidity to satisfy the regulation. Improvements in household solvency result in less financial distress and, given negative idiosyncratic shocks, better liquidity management. However, fewer households transition from renting into ownership. These effects are stronger among liquidity-constrained households.

The Macroprudential Toolkit: Effectiveness and Interactions

Stephen Millard
,
Bank of England
Margarita Rubio
,
Nottingham University
Alexandra Varadi
,
University of Oxford

Abstract

We use a DSGE model with financial frictions, leverage limits on banks, loan-to-value limits and debt-service ratio (DSR) limits on mortgage borrowing, to examine: i) the effects of different macroprudential policies on key macro aggregates; ii) the interaction of DSR limits with the rest of the macroprudential toolkit and with monetary policy; and iii) the effects of various macroprudential tools on welfare. We find that both capital requirements and DSR limits reduce the need for monetary policy to react to a housing demand shock, and that DSR limits also contribute to monetary stability when the economy is hit by technology shocks. Additionally, we find that introducing capital requirements on banks reduces the volatility of lending, house prices, output and inflation only marginally relative to an LTV ratio on mortgage borrowing. Finally, we show that DSR limits lead to an increase in the volatility of real house prices and to a signicant decrease in the volatility of lending, consumption and inflation, since they remove the link between house price shocks and mortgage borrowing. Overall, DSR limits are welfare improving relative to any other macroprudential tool.
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit